FORM 10-QSB--QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period.........to.........
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (864) 239-1000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days Yes X No .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1997
Assets
Cash and cash equivalents:
Unrestricted $ 1,015
Restricted--tenant security deposits 188
Accounts receivable 131
Escrow for taxes 386
Restricted escrows 774
Other assets 388
Investment properties:
Land $ 2,878
Buildings and related personal property 41,159
44,037
Less accumulated depreciation (20,410) 23,627
$ 26,509
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 197
Tenant security deposits 188
Accrued taxes 501
Other liabilities 251
Mortgage notes payable 26,451
Partners' Deficit
General partners $ (457)
Limited partners (1,224.25 units
issued and outstanding) (622) (1,079)
$ 26,509
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Revenues:
Rental income $ 2,105 $ 2,178 $ 4,189 $ 4,340
Interest income 16 15 35 27
Other income 245 176 376 358
Casualty gain -- 250 -- 186
Total revenues 2,366 2,619 4,600 4,911
Expenses:
Operating 807 830 1,570 1,576
General and administrative 60 78 133 160
Maintenance 301 247 524 468
Depreciation 499 480 997 953
Interest 639 626 1,258 1,243
Bad debt recovery, net -- (40) -- --
Property taxes 160 156 353 345
Total expenses 2,466 2,377 4,835 4,745
Net (loss) income $ (100) $ 242 $ (235) $ 166
Net (loss) income allocated
to general partners (2%) $ (2) $ 5 $ (5) $ 3
Net (loss) income allocated
to limited partners (98%) (98) 237 (230) 163
Net (loss) income $ (100) $ 242 $ (235) $ 166
Net (loss) income per
limited partnership unit $ (80.36) $ 193.59 $(187.87) $ 133.14
See Accompanying Notes to Consolidated Financial Statements
c) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1996 1,224.25 $ (450) $ (294) $ (744)
Net loss for the six months
ended June 30, 1997 -- (5) (230) (235)
Distributions paid -- (2) (98) (100)
Partners' deficit at
June 30, 1997 1,224.25 $ (457) $ (622) $(1,079)
See Accompanying Notes to Consolidated Financial Statements
d) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1997 1996
Cash flows from operating activities:
Net (loss) income $ (235) $ 166
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 997 953
Amortization of loan costs, discounts
and lease concessions 130 131
Casualty (gain) -- (186)
Change in accounts:
Restricted cash (6) (7)
Accounts receivable (62) 33
Escrow for taxes and insurance (9) (8)
Other assets (64) (2)
Accounts payable (11) 28
Tenant security deposit liabilities 6 6
Accrued taxes (84) (4)
Other liabilities 4 (27)
Net cash provided by operating
activities 666 1,083
Cash flows from investing activities:
Property improvements and replacements (257) (473)
Deposits to restricted escrow (48) (321)
Receipts from restricted escrow -- 3
Insurance proceeds from property damage -- 227
Net cash used in investing activities (305) (564)
Cash flows from financing activities:
Principal payments on notes payable (250) (231)
Loan costs -- (3)
Distributions (100) --
Net cash used in financing activities (350) (234)
Net increase in cash 11 285
Cash and cash equivalents at beginning of period 1,004 714
Cash and cash equivalents at end of period $ 1,015 $ 999
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,104 $ 1,114
Property improvements and replacements in
accounts payable $ -- $ 37
See Accompanying Notes to Consolidated Financial Statements
e) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Davidson Diversified Real
Estate II Limited Partnership (the "Partnership") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1997, are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in the Partnership's annual
report on Form 10-KSB for the fiscal year ended December 31, 1996.
Certain reclassifications have been made to the 1996 information to conform to
the 1997 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following amounts were paid or
accrued to the Managing General Partner and affiliates in 1997 and 1996 (in
thousands):
Six Months Ended
June 30,
1997 1996
Property management fees (included in operating expenses) $220 $211
Reimbursement for services of affiliates (included in general
and administrative and operating expenses) 87 113
During 1996, Shoppes At River Rock (formerly Outlet's Ltd. Mall) was managed by
a third party. As of January 1997, the Managing General Partner assumed
management of the day to day operations.
The Partnership insures its properties under a master policy through an agency
and insurer unaffiliated with the Managing General Partner. An affiliate of the
Managing General Partner acquired, in the acquisition of a business, certain
financial obligations from an insurance agency which was later acquired by the
agent who placed the current year's master policy. The current agent assumed
the financial obligations to the affiliate of the Managing General Partner who
receives payments on these obligations from the agent. The amount of the
Partnership's insurance premiums accruing to the benefit of the affiliate of the
Managing General Partner by virtue of the agent's obligations is not
significant.
NOTE C - DISTRIBUTION TO PARTNERS
In February 1997, the Partnership distributed approximately $100,000 to the
partners. The limited partners received approximately $98,000 ($80.05 per
limited partnership unit) and the general partners received approximately
$2,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of four apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for each of the six months ended June 30, 1997 and 1996:
Average
Occupancy
1997 1996
Big Walnut Apartments
Columbus, Ohio 95% 96%
Lafontenay Apartments
Louisville, Kentucky 93% 93%
The Trails Apartments
Nashville, Tennessee 92% 93%
Greensprings Manor Apartments
Indianapolis, Indiana 87% 94%
Shoppes At River Rock
(Formerly Outlet's Ltd. Mall)
Murfreesboro, Tennessee 75% 83%
The Managing General Partner attributes the decrease in occupancy at
Greensprings Manor Apartments to a soft market caused by increased competition
as a result of newly constructed units. Occupancy at the Shoppes At River Rock
has also decreased due to increased competition. The property is not located in
the retail corridor which makes it difficult to position the property. The
Managing General Partner is in the process of exploring different concepts such
as "big box", entertainment, and specialty center in an effort to reposition the
Mall in hopes of reestablishing occupancy levels.
The Partnership's net loss for the three and six month periods ended June 30,
1997, was approximately $100,000 and $235,000, respectively, compared to net
income of approximately $242,000 and $166,000, respectively, for the same
periods of 1996. The change from net income to net loss is primarily
attributable to a casualty gain of $186,000 for the six months ended June 30,
1996, a decrease in rental income, and an increase in maintenance expense. The
Partnership recorded a net casualty gain in 1996 resulting from two fires at the
Trails Apartments which destroyed four apartment units and caused minor smoke
damage in one unit. The damage resulted in a net gain of approximately $186,000
as of June 30, 1996 arising from proceeds from the Partnership's insurance
carrier which exceeded the basis of the property and expenses to reconstruct the
four destroyed apartment units and to repair the other unit which incurred minor
smoke damage. The decrease in rental income is due to decreases in occupancy at
Shoppes At River Rock and Greensprings Manor, as discussed above. The increase
in maintenance expense is due to plumbing fixtures at Lafontenay Apartments, and
the repair of pool decking at Greensprings Manor Apartments. Offsetting the
above decreases to net income is an increase in interest income and a decrease
in general and administrative expense. The increase in interest income is due
to increases in interest-bearing reserves. The decrease in general and
administrative expense is attributable to a decrease in partnership
administration cost reimbursements. Bad debt recovery for the three months
ended June 30, 1996 related to collection of past due rents from tenants at
Greensprings Manor Apartments that had been evicted during the first quarter of
1996.
Included in maintenance expense is approximately $71,000 of major repairs and
maintenance comprised of new gas service lines, and water saving devices for the
six months ended June 30, 1997. For the six months ended June 30, 1996,
approximately $67,000 of major repairs and maintenance is included in operating
and maintenance expense comprised of exterior building repairs, window
coverings, and major landscaping.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions which can result in the use of rental
concessions and rental reductions to offset softening market conditions, there
is no guarantee that the Managing General Partner will be able to sustain such a
plan.
The Partnership had unrestricted cash of approximately $1,015,000 at June 30,
1997, versus unrestricted cash of approximately $999,000 at June 30, 1996. Net
cash provided by operating activities decreased primarily due to the change from
net income to net loss as discussed above. Also contributing to the decrease in
net cash provided by operating activities were the decrease in accrued taxes and
the increases in accounts receivable and other assets. The decrease in accrued
taxes was due to timing of the tax payment. The increase in accounts receivable
is due to the timing of receipts from tenants. The increase in other assets is
due to an increase in prepaid insurance caused by the required down-payment at
the renewal of the insurance policies in May 1997. Net cash used in investing
activities decreased due to a decrease in deposits to restricted escrows and a
decrease in property improvements and replacements. Offsetting these items was
the receipt in 1996 of insurance proceeds related to the casualty gain at The
Trails as discussed above. Net cash used in financing activities increased due
to the Partnership making a distribution in 1997.
The Partnership has no material capital programs scheduled to be performed in
1997, although certain routine capital expenditures and maintenance expenses
have been budgeted. These capital expenditures and maintenance expenses will be
incurred only if cash is available from operations or is received from the
capital reserve account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of approximately $26,451,000, net of discount, with
stated interest rates of 7.6% to 10.125%, has maturity dates ranging from August
1997 to December 2009. Included in the outstanding indebtedness is a first
mortgage, secured by the Lafontenay Apartments, which matures August 1, 1997,
with a principal balance due at maturity of approximately $6,720,000. The
Managing General Partner intends to refinance this indebtedness. No
distributions were made during the six months ended June 30, 1996. In February
1997, the Partnership distributed approximately $100,000 to the partners. The
limited partners received approximately $98,000 ($80.05 per limited partnership
unit) and the general partners received approximately $2,000. Future cash
distributions will depend on the levels of net cash generated from operations,
refinancings, property sales and the availability of the cash reserves.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President/CAO
Date: August 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II Limited Partnership 1997 Second Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,015
<SECURITIES> 0
<RECEIVABLES> 131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 44,037
<DEPRECIATION> 20,410
<TOTAL-ASSETS> 26,509
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,451
0
0
<COMMON> 0
<OTHER-SE> (1,079)
<TOTAL-LIABILITY-AND-EQUITY> 26,509
<SALES> 0
<TOTAL-REVENUES> 4,189
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,259
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (235)
<EPS-PRIMARY> (188.19)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
